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ECN 104 Study Guide - Midterm Guide: Black Market, Price Controls, Progressive Tax

Course Code
ECN 104
Tsogbadral Galaabaatar
Study Guide

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Midterm Review (Chapter 1 –9)
Chapter 1:
What Economics Is All About
Scarcity: the limited nature of society’s resources
Economics: the study of how society manages its scarce resources,
how people decide what to buy,
how much to work, save, and spend
how firms decide how much to produce,
how many workers to hire
how society decides how to divide its resources between
national defence, consumer goods, protecting the environment,
and other needs
Society faces an important tradeoff:
efficiency vs. equality
Efficiency: when society gets the most from its scarce resources
Equity: when prosperity is distributed uniformly among society’s
Tradeoff: To achieve greater equality,
could redistribute income from wealthy to poor.
But this reduces incentive to work and produce, shrinks the size of the
economic “pie.”
Making decisions requires comparing the costs and benefits of
alternative choices.
The opportunity cost of any item is
whatever must be given up to obtain it.
It is the relevant cost for decision making
The opportunity cost of…
…going to college for a year is not just the tuition, books, and fees, but
also the foregone wages.
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the cinema
Rather than being self-sufficient,
people can specialize in producing one good or service and exchange it
for other goods.
Countries also benefit from trade & specialization:
Get a better price abroad for goods they produce
Buy other goods more cheaply from abroad than could be
produced at home
The invisible hand works through the price system:

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The interaction of buyers and sellers
determines prices.
Each price reflects the good’s value to buyers and the cost of
producing the good.
Prices guide self-interested households and firms to make
decisions that, in many cases, maximize society’s economic
Huge variation in living standards across countries and over time:
Average income in rich countries is more than ten times average
income in poor countries.
The Canadian standard of living today is about
eight times larger than 100 years ago.
The most important determinant of living standards: productivity,
the amount of goods and services produced from each hour of a
worker’s time.
Productivity depends on the equipment, skills, and technology
available to workers.
Other factors (e.g., labour unions, competition from abroad) have far
less impact on living standards.
In the short-run (1 – 2 years),
many economic policies push inflation and unemployment in opposite
Other factors can make this tradeoff more or less favourable, but the
tradeoff is always present.
Chapter 2:
The Economist as Scientist
Economists play two roles:
1. Scientists: try to explain the world
2. Policy advisors: try to improve it
In the first, economists employ the
scientific method, the dispassionate development and testing of
theories about how the world works.
Assumptions & Models
Assumptions simplify the complex world,
make it easier to understand.
Example: To study international trade,
assume two countries and two goods.
Unrealistic, but simple to learn and
gives useful insights about the real world.
Model: a highly simplified representation of

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a more complicated reality.
Economists use models to study economic issues.
Our First Model:
The Circular-Flow Diagram
The Circular-Flow Diagram: a visual model of the economy, shows
how dollars flow through markets among households and firms
Two types of “actors”:
Two markets:
the market for goods and services
the market for “factors of production”
Our Second Model:
The Production Possibilities Frontier
The Production Possibilities Frontier (PPF):
a graph that shows the combinations of
two goods the economy can possibly produce given the available
resources and the available technology
Two goods: computers and wheat
One resource: labour (measured in hours)
Economy has 50,000 labour hours per month available for
Microeconomics and Macroeconomics
Microeconomics is the study of how households and firms make
decisions and how they interact in markets.
Macroeconomics is the study of economy-wide phenomena, including
inflation, unemployment, and economic growth.
These two branches of economics are closely intertwined, yet distinct –
they address different questions.
The Economist as Policy Advisor
As scientists, economists make
positive statements,
which attempt to describe the world as it is.
As policy advisors, economists make
normative statements,
which attempt to prescribe how the world should be.
Positive statements can be confirmed or refuted,
normative statements cannot.
The Govt of Canada, like other governments, relies on the advice of
economists. Many government agencies and departments, including
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